U.S. economic growth during the second quarter of the year was stronger than previously thought, the Commerce Department reported on Wednesday, partly because businesses built up inventories at the strongest rate in four years.
U.S. gross domestic product — the measure of total output within the nation’s borders — expanded at a revised 3.3 percent annual rate in the April-June second quarter.
That was up from a 2.8 percent rate the government estimated a month ago but still slower than the first quarter’s 4.5 percent rate, and the most sluggish rate of GDP advance since the first quarter of 2003.
With the state of the economy looming large as a factor in November presidential elections, the GDP report represents positive news for President Bush ahead of a debate on Thursday with Democratic contender Sen. John Kerry, who has criticized lagging job creation and record budget deficits since the Bush administration took power in January 2001.
The GDP figure was the second and final revision to second-quarter performance and handily outpaced Wall Street economists’ forecasts for a 3 percent rate of growth.
Though well down from the first quarter’s rate of expansion, it left the economy in better shape than anticipated for a widely forecast pickup in growth in the second half of the year.
Not so bad, really
“It looks like the economy wasn’t all that soft in the second quarter,” said economist Gary Thayer of A.G. Edwards and Sons Inc. in St. Louis, Mo. “Generally, it shows the economy healthy and seeing growth in most categories.”
Inflation also was muted, with a favorite price gauge cited by Federal Reserve Chairman Alan Greenspan — the index of personal consumption expenditures excluding volatile food and energy — slowing to a 1.7 percent annual rate of increase from 2.1 percent in the first quarter.
The main reason for the second-quarter GDP falloff after a vigorous first quarter was weaker consumer spending, which eased to a 1.6 percent annual rate - the softest since 1 percent in the second quarter of 2001 - from 4.1 percent in the first quarter.
But businesses kept building up inventories strongly, adding to them at a $61.1 billion rate in the second quarter after a $40 billion increase in the first three months of the year.
Financial markets showed only a muted reaction to the data, which is considered backward-looking at this stage. Official figures on third-quarter GDP performance will not be available for another month.
The dollar gained moderately against other major currencies, reflecting the U.S. economy’s resilience that Treasury Secretary John Snow is expected to highlight when he meets fellow finance ministers from the Group of Seven industrial countries this Friday.
Looking for profits
Prices for Treasury debt securities were down, possibly a reflection of investors’ hopes that future corporate profits will be stronger and so make stocks relatively more attractive. During the second quarter, however, after-tax corporate profits fell at a $6.4-billion annual rate after climbing $32.3 billion in the first three months of the year.
Commerce Department officials said the pace of inventory-building in the second quarter was the strongest since a $99.3-billion rate of buildup in the second quarter of 2000.
Inventory accumulation can be a sign of potential economic weakness, to the extent that it reflects less consumption, but it also is considered a strength since it keeps factories busy and reflects confidence that spending likely will snap back in future.
A substantial part of the inventory buildup has occurred in the auto sector and the big carmakers already are gearing up for rebates and financing incentives to thin out the stocks on dealer lots.
One positive influence on second-quarter GDP came from a downward revision in imports — which subtract from national output — and greater exports of both U.S.-made goods and services than reported a month ago. Commerce revises the GDP data twice each quarter in part to reflect the latest available data on international trade.